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Chart of the Day: what is the real inflation rate?

The consumer price index (CPI) rose to 4.4% in July. This is the same data that was recently described by a trio of experts as ‘misleading the general public and of doubtful relevance for policy purpose'.


by Chris Marshall on Aug 16, 2011 at 12:53

Official inflation data are ‘misleading the general public and of doubtful relevance for policy purposes,’ concluded a trio of international experts in a report earlier this year.

The government's preferred measure, the consumer price index (CPI), which today came in at 4.4% for July, was described in the research published back in February as ‘little more than a political convenience’, mostly to allow comparisons with EU data.

These experts’ conclusions validated the experiences of people all round the country, who look at inflation figures and see something abstract, generalised and possibly far removed from their real-life experience and costs. The comments made by readers under Citywire's news article on the economists' critique are telling. 'No, we are not mislead by official data,' wrote Tony Peterson. 'We know that official statistics are bent, and we can measure the fact from our own experience.'

The same economists observed in their report: ‘Those in authority have always had a vested interest in defusing this situation by showing slower price increases.’ The government’s decision to start using the CPI measure to uprate benefits instead of the retail prices index (RPI) that includes housing costs (and came in at 5% in July) is one such example.

Attempts have been made to provide a more representative picture of inflation for different sections of society, with several groups campaigning hard to show that the elderly face higher inflation than others. The chart above from Saga (using ONS data) illustrates how big the differences can be between inflation (in this case RPI) between pensioners and the rest of us. At its most extreme, as the graph shows, in 2008 RPI inflation for one person pensioner households hit 10%.

People’s inflation also varies according to where they live, the socio-economic group they are in and a myriad of other differences.

Efforts are being made to better capture trends in prices. Google is creating a new inflation measure – the Google price index – based on the cost of goods sold online. The tech giant hopes this will prove more accurate and up-to-date than official statistics.

11 comments so far. Why not have your say?


Aug 16, 2011 at 14:53

Gosh! Politicians like to lie to us! Who would have guessed it?

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Jeremy Bosk

Aug 16, 2011 at 21:20

Every single group in society has a different inflation rate. By the time you sliced and diced the more general measures to suit each group they would be of only minor interest to future historians. Use the general figures but be aware of what they do and do not include.

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Aug 17, 2011 at 11:18

Anyone who visits a supermarketregularly will soon realise that food price inflation is more like 10% p.a at present. Add to this fuel price inflation 15-18% range. 8% rise in train fares. Ever rising petrol prices etc. 4% inflation is complete rubbish. My guesstimate is that for most people 10 -12% inflation is more realistic. Unfortunately there seems no way for governments to control this supply side inflation which is driven by out of control commodity markets.

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Jeremy Bosk

Aug 17, 2011 at 12:34


Food price inflation is partly seasonal, partly due to weather conditions in food growing reasons, partly due to the cost of inputs such as fuel, fertilisers (many oil based), indeed so many factors are involved that only time will tell how much is permanent. Some of it is permanent as the developing world switches from vegetables to more meat, just as our western societies did in the nineteenth century. Not to mention population growth. But it fluctuates so looking at this month's figures is not particularly enlightening.

Oh, I forgot: exchange rates. The rest of the world is so frightened of the chaos elsewhere that it actually buys British debt and equities. Which drives up the currency and makes all our imports, food, fuel, manufactures, raw materials... more expensive.

Commodity markets rise and fall with industrial demand for hard commodities, weather influenced supply issues for agricultural commodities, natural and man made disasters, and financial panic driving demand for precious metals and diamonds.

Since markets react to events any sensible attempt to influence their behaviour looks at which events are controllable, which are not and how influence may be exerted.

The weather is in the short term uncontrollable. Longer term climate change can only be controlled by either political decisions or apocalypse.

Economic ups and downs are largely influenced by human factors, chiefly the quality of political leadership in the democracies (mostly incompetent and / or insane) and the attempts to change corrupt and inefficient autocracies in the Third World into marginally less inefficient but still corrupt democracies.

Financial panic leading to hoarding of precious commodities is a combination of ignorance, stupidity, childish lack of emotional self control and the aforementioned bad politics. This is exacerbated by trend following investors hoping to make a quick buck. There is no meaningful distinction to be made between investment and speculation, it is part of a continuum. Getting upset and moralistic, howling for more regulation is a waste of energy. Mature judgement achieves better results.

The markets will control themselves if more people abandon the habit of a lifetime and use their brains.

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Anonymous 1 needed this 'off the record'

Aug 17, 2011 at 21:26

Jeremy Bosk

Not everbody is fortunate enough to have the brain you have, nor time to play the diligence game required.

And hence the problem.

Prof Eman

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Jeremy Bosk

Aug 17, 2011 at 23:13

Well Prof,

Then they should stay away from commodities and leave investment or speculation to the professionals. Paying a professional will cost money and lead to poorer results than a well run DIY approach but is far better than a badly run DIY approach.

But this forum is about what is the real inflation rate, not investment strategies to minimise the effects. I was not giving investment advice. My point was to show that there is much more to inflation than commodities and that commodities themselves do not just go up or down because of speculators or any other kind of market manipulation. To do this, I gave as thorough an explanation of what does cause commodity prices to fluctuate as I could without copying entire text books.

Since you appear interested, I mainly play commodities through buying shares in miners, oil companies and their suppliers. I currently also hold a dealer in coins.

I do have a better brain than some but that is not as big an advantage as you might think. Research has shown that a diligent person of moderate intelligence can do very nearly as well as a diligent genius and much better than a slap-dash genius - if that is not an oxymoron.

Finding a method that works and suits your temperament, then sticking to it gets the job done.

It has just hit me that perhaps you were talking all the time about compiling inflation indices for particular sections of the community and the diligence word just threw me off your track?

Your statements and questions often seem to me so cryptic and elliptical as to have many possible meanings. I had the same problem with the Eleven Plus exam where the examiners thought they had asked one question but there were several ways to understand what they said and so several valid answers. You can have the same words with the same spellings that mean different things in different languages. The name Jean in French and English refer to different sexes. Cul-de-sac means a road with only one entrance in English and a rather vulgar anatomical expression in French. Rubber in British English means what Americans call an eraser. Rubber in American English means condom. Which is why that style of examination is a very poor guide to anything.

If you were talking indices, then it is a periodic effort. A pensioner organisation or one for single parent families, whatever, does the work using several years worth of data - which of course usually takes several years to obtain - and will usually find that the cost of living for, say, pensioners is correlated to that for everyone else.

The indices have many sub indices. Pensioners may spend the same on pet food or cigarettes as everyone else but less on travel (because they do not commute to work) and more on heating (because they stay home all day and have poorer circulation. Having worked all this out once you need only check every few years that the correlations still apply. In between times you take the usual sub indices and weight them for pensioners' expenditure patterns. It might be (dummy figures here) that pensioners spend 70 per cent less than the national average on petrol but 50 per cent more on gas and electricity.

If enough people really want the answer they will pay someone to find it. Not such a big problem.

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Aug 18, 2011 at 08:48

> Which drives up the currency and makes all our imports, food, fuel, manufactures, raw materials... more expensive.

Eh? In your scenario the £ appreciates and imports get dearer as measured in £? Where did that come from?

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Jeremy Bosk

Aug 18, 2011 at 12:59


Quite right. I got it completely the wrong way round. Apologies. Maybe I need to be less hyperactive and take a break.

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Aug 21, 2011 at 09:40

I thought there is now more concern for a second recession and negative GDP growth. If true than shoudn't we be more concerned for deflation which in turn leads to falling prices? If demand falls (due to high unemployment), prices should fall too. The problem seems to be not too high inflation but how to revive the economiy which appears to be a structural problem. There is world over supply in many goods and services which requires adjustment and transition to new ones.

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Aug 21, 2011 at 11:24

Hi Jeremy, I think you have laid out a coherent argument, but have fallen into a trap caused by one of the pernicious aspects of the deliberate propaganda of mismeasured inflation. That is, a cohort of consumers, whether it's the young or the old will only spend what they can afford. It boots little to say that a pensioner doesn't spend very much on travel because they are old. That is insulting when the cost of their essential items has taken away the affordability of travel. Pensioners cannot elect to travel if they do not have the money as it has been spent on rising fuel bills, rates and food. Similarly, if the majority of young people cannot afford an education then reflecting a diluted impact of student loans on the broad measure of inflation hides the fact that a large number of young people are not students because they can't afford fees. The list goes on for couples with children who cannot afford a holiday and so measuring inflation for the far fewere couples who do go on holiday completely misses the point. Inflation measures are accurate for what they measure, but completely inaccurate for what harm is being done in society by inflation and the change in consumer behaviour that results from price changes. Perhaps the term is "auto correlation" or "causal", but the current monetary policy of rewarding risk taking by banks with over extended balance sheets and faulty loan portfolios (and fat bonuses by gaming the government and the bank of england). Final point, if I may, hard work is its own reward, your comments on your level of intelligence distract from your argument.The reader can judge that for themselves. "Not bad" would be my observation!

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Jeremy Bosk

Aug 21, 2011 at 17:31


The Germans and many other Europeans are so scared of a re-run of 1930s style hyper-inflation and what that led to - Nazism - that they are shaken out of good sense on the subject of inflation. The Americans remember the horrors of deflation in the Great Slump of the 1930s and are equally scared out of their wits.


I agree with most of what you say.

I specifically stated that retired people do not travel as much because they no longer commute. Some also travel less on holiday because they are poor and some travel a great deal more on holiday because they do have the money and time. I am one of those who travels less for both reasons.

I mentioned my intelligence in response to an earlier remark on my intelligence by Prof Eman. He chided me for my impatience with people whom he regarded as not as clever as me. As a simple fact, I have an IQ very much above the average. Whatever IQ really means. I was trying to explain to him precisely that intelligence is not enough to lead a happy and successful life. I was quoting academic research which proved this with reference to the stock market.

I entirely agree that hard work in a good cause is its own reward. For me it has had to be. I have no family, have poor health and am not even moderately well off. I keep going on a very small pension from early retirement supported by very hard work on the stock market to make my small savings go further. I have to wait another three years to receive any state benefits.

Intelligence is a big help, education is a big help, hard work is a big help. Health and an even average amount of luck are essential.

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